The Importance Of Property Insurance

The basic goal behind buying insurance is to make you financially whole following a loss. You agree to pay a (relatively) small fee to an insurance company today, causing a small but certain loss to you now, in exchange for a guarantee from the insurance company that it will bear the burden of a large but uncertain loss in the future.

Who Needs Insurance?Thankfully for those of us who might be negligent in our responsibility to have insurance on our property, we are forced in many cases by either law or contract (the mortgage contract) to carry insurance. While not many, if any, U.S. state laws require you to carry property insurance, they do often require some form of liability insurance, especially for cars. This covers repair or financial restitution to someone else besides the individual at fault. For example, the person at fault's liability insurance pays to have their car fixed, or pays their medical bills. Fortunately, when most of us purchase the required liability coverage, we are given the opportunity to purchase the property insurance (i.e. comprehensive or collision insurance) rather easily, thus saving us from financial hardship if our own car is damaged in the accident.

CoverageAccording to a survey published in the Journal of Financial Planning, many homeowners have vastly misguided views of what their homeowners insurance actually covers. According to this survey conducted by the National Association of Insurance Commissioners, "One third of homeowners believe flood damage will be covered by their standard policy. Over half think their policy covers them in the event of a water line break. Thirty-five percent say they will be compensated for an earthquake, and a slightly lesser proportion thinks mold is covered."In actuality, the typical perils (causes of property destruction) that are typically not covered are:

Policies are often written so that for something to be covered, it must be "sudden and accidental", meaning that it wasn't a slow leak that caused damage over many months. Often this is not covered by insurance. If your roof caves in from old age, and not from storm damage, it will likely not be covered. The typical perils which typically are covered include:

Fire

Wind (tornado or hurricane)

Hail

Theft

Liability CoverageIn addition to covering the value of your home or other property, many insurance policies also include an important provision for liability coverage. You may not think this is very important, being the careful person that you are, however, there are scores of eager lawyers in every city searching high and low for lawsuits against people such as yourself. Liability coverage is well known to owners of automobiles, but may be lesser-known to homeowners.

If your neighbor's house catches fire because you left your charcoal grill unattended, who do you think will pay for the damage caused by the fire? You will. You have paid the insurance company your premiums so that they will pay for larger claims when they do occur. The same goes for someone who is hurt and requires medical attention while on your property.

If you are on vacation and your property is stolen, such as a diamond ring, you may be entitled to reimbursement. Be sure to document the theft with evidence that you owned it and you should be able to provide a police report to the insurance company.

Don't Guess - KnowYou should know what your policy does and - more importantly - does not cover. Insurance companies don't stay in business by charging a minimal amount to cover any and all things which could possibly happen to your property.

Also, if your property, especially your house, is left vacant for more than a certain time period, such as 60 days, then the homeowners policy may be canceled immediately by the insurance company. It is assumed that a vacant house is at a much higher danger of perils such as fire or theft, and therefore changes the risk profile enough to require a separate policy. If you have a second home or a vacation property, you may get another policy to cover this home as well.

Pitfalls to AvoidCheck to see if your policy covers repairs at actual cash value (ACV) or at replacement cost. Replacement cost is usually much better. Case in point: If your roof was damaged and needs to be completely replaced, replacement cost will pay for it to be fully repaired less your deductible, while ACV will pay you what your roof was estimated to actually be worth at the time of the damage. The tradeoff is that ACV costs less than replacement cost coverage.

Art and JewelryAdditionally, if you have expensive jewelry or art that you want covered, you may need to add a floater. This is an add-on to your main policy. Many policies have standard amounts that they will pay out for losses to particular items, and they will pay no more.

Premium FactorsDo you live in an area prone to tornadoes, hurricanes or floods? Do you own a large dog or a swimming pool? Are you a smoker? How's your credit score?

You may be a higher-than-normal risk based on your answers to these questions, and they will charge you accordingly. These are factors that the insurance company takes into account when setting your insurance rates. The more that these and other risks are applicable to you, the higher your rates will be.

Final ThoughtsOne last warning: some insurance companies provide seemingly unbelievable rates for their policies. If the company is unknown and its rates are exceptionally good, this should be a red flag for you. Check around for the company's reputation, and don't just take the salesman's word for it. Have a look at the policy and see what they cover, and what they don't. You may find only too late that what you thought was adequate coverage, was barely the legal minimum in your area. Seek quality coverage - remember, "cheap insurance can be very expensive."